Comments on: Investing in bonds while rates are rising http://blogs.reuters.com/felix-salmon/2013/06/11/investing-in-bonds-while-rates-are-rising/ A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: maynardGkeynes http://blogs.reuters.com/felix-salmon/2013/06/11/investing-in-bonds-while-rates-are-rising/comment-page-1/#comment-47328 Thu, 13 Jun 2013 09:11:20 +0000 https://blogs.reuters.com/felix-salmon/?p=22053#comment-47328 @solotar: Suppose other owners of the bond fund do panic, but you stay put. Are you negatively impacted by redemptions regardless? I mean aside from the immediate dip?

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By: Sechel http://blogs.reuters.com/felix-salmon/2013/06/11/investing-in-bonds-while-rates-are-rising/comment-page-1/#comment-47326 Thu, 13 Jun 2013 00:31:25 +0000 https://blogs.reuters.com/felix-salmon/?p=22053#comment-47326 For many types of bonds, bond funds are an absolutely terrible way to invest. If the intended and actual asset quality of the fund is high such as in a treasury or GNMA portfolio you are not benefiting from someone doing credit analysis. Add to that the problem of duration which never comes down. While I think one could make a good case for professional management in say a high yield portfolio, the average person with some financial knowledge could construct a laddered diversified portfolio of actual bonds. In this way you’ve accomplished two things, diversification, and bonds always coming due that can be reinvested at higher yields in a rising rate environment, and if rates come down, you know you have some bonds that will provide that higher return for perhaps as many as 7-10 years.
There is one added benefit, low trading costs since everything is buy to hold, and if you buy in the primary market, you pay the same as everyone else.

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By: solotar http://blogs.reuters.com/felix-salmon/2013/06/11/investing-in-bonds-while-rates-are-rising/comment-page-1/#comment-47323 Wed, 12 Jun 2013 21:55:01 +0000 https://blogs.reuters.com/felix-salmon/?p=22053#comment-47323 Imagine 2 investors. One buys a 20-bond portfolio, laddered. Another buys the exact same 20 bonds but via a mutual fund conduit. The fund investor is going to pay an advisory fee, but for the sake of argument let’s say the fund’s execution advantage relative to the individual investor (bid-ask spread, etc.)is identical to the expense ratio – although in the muni space that’s seldom the case. Bottom line is that the “advantage” of the ladder over the fund only exists to the extent that the ladder owner doesn’t panic and sell after rate rises while the owners of the mutual fund do panic and sell. Don’t feel too sorry for the owner of Vanguard bond funds; they are going to be just fine relative to people building their own bond ladders.

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By: 3underscore http://blogs.reuters.com/felix-salmon/2013/06/11/investing-in-bonds-while-rates-are-rising/comment-page-1/#comment-47321 Wed, 12 Jun 2013 16:53:46 +0000 https://blogs.reuters.com/felix-salmon/?p=22053#comment-47321 I would guess that the interest rate risk model isn’t integrated at all with the credit risk models.

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By: maynardGkeynes http://blogs.reuters.com/felix-salmon/2013/06/11/investing-in-bonds-while-rates-are-rising/comment-page-1/#comment-47320 Wed, 12 Jun 2013 16:43:13 +0000 https://blogs.reuters.com/felix-salmon/?p=22053#comment-47320 TIPS are taxed at exactly the same rate as nominals.(Fisher equation) If you are worried about the so called “phantom income” from the inflation adjustment to the principal, buy VAIPX. Problem solved for 0.10%. Hardly a nightmare.

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By: tombrakke http://blogs.reuters.com/felix-salmon/2013/06/11/investing-in-bonds-while-rates-are-rising/comment-page-1/#comment-47317 Wed, 12 Jun 2013 04:52:28 +0000 https://blogs.reuters.com/felix-salmon/?p=22053#comment-47317 Regarding: “1994, the last time that we had a bear market in bonds.” Part of the problem is that there are so many different kinds of bonds, with different maturities and structures and credit profiles. “The bond market” is a series of markets, at times moving in unison and at times not.

Even in Treasuries, there have been moves since 1994 that have been more dramatic in price than that one.

But all of that is parsing. In broad brush, it has been a bull market in bonds of all types for more than thirty years, so if the test is who has managed through something other than a supportive environment for an extended period, you’re going to have to get some folks out of retirement.

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By: y2kurtus http://blogs.reuters.com/felix-salmon/2013/06/11/investing-in-bonds-while-rates-are-rising/comment-page-1/#comment-47315 Wed, 12 Jun 2013 01:49:53 +0000 https://blogs.reuters.com/felix-salmon/?p=22053#comment-47315 My two thoughts:

#1 if rates go up but the yield curve steepens by 200 basis points that won’t be quite so bad for bond fund holders. A steep yield curve means a bond fund buying 8 year bonds and selling them 3 years later as 5 year bonds gets a nice coupon+ rate of return. In that environment you get something pretty rare… a financial benefit from financial services. Bond fund managers in a steep yield curve are the only fund managers that as a group add value vs a buy and hold strategy. Not rocket science… you buy decent credits you clip coupons and unlike used cars bonds appreciate in value as they age.

#2 It is extremely hard to imagine a set of economic circumstances where the “safest” bonds, western 1st world sovereigns, offer any positive yield over the next 10 years. Look at Japan… they are in a much tougher spot than we are… but 20% currency depreciation in 6 months and they are just getting the printing presses warmed up. Not like they have a choice with 225% debt to GDP and a shrinking workforce.

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